Remarkable confessions of a failed VC deal

The startup blog post of the day has to be Rand Fishkin’s extraordinary piece detailing how SEOmoz was about to receive $24 million in funding, until the lead venture firm backed out at the last minute.

Fishkin speculates that the deal fell through because of a slight dip in July revenue — even though SEOmoz is on track to double sales this year to $11.4 million and post its third consecutive year of profits.

Personally, I feel burned. This is the second time in 3 years that I’ve gotten excited about raising a potential round of capital, and it turned out terribly both times. I’m not sure what I did wrong or what I should do differently next time.

SEOmoz, which offers tools and services for search-engine optimization, was going to use the funding to expand beyond SEO and into new categories such as social and mobile. The capital would also cover the rising cost of its Web infrastructure, increase marketing, pay for a new Seattle office and give Fishkin (pictured) and his mother a cash payout.

Today’s post is a bookend to a similar post Fishkin published in January 2010, about his last attempt to raise capital. That one also fell through but resulted in a priceless primer on venture capital for entrepreneurs.

Startup bosses periodically post educational, confessional blogs to help their peers navigate common challenges or learn from their mistakes. But they rarely provide so many details or shine so much light on the gyrations of the funding process.

This time around, Fishkin started the quest in November and had a serious bite in May. Negotiations resulted in a deal that would provide $19 million from the unnamed new investor and $5 million from Bellevue’s Ignition Partners, which had invested $1 million in SEOmoz in 2007.

The new deal valued SEOmoz at $89 million after the deal closed and provided a $1.25 million payout to Fishkin, the chief executive, and $4.75 million payout to his mother, Gillian Muessig, who started the predecessor marketing company in 1981.

Before the deal was closed, the market had its August dive and VentureBeat prematurely reported that SEOmoz had completed the financing. Fishkin speculates in the blog that someone may have warned off the VC firm after reading the VentureBeat story, or that the firm became skittish after the market’s dip.

The deal fell through last week and Fishkin informed his team on Aug. 24. In the memo, posted in today’s blog entry, he said the company will now decide whether to see other investors but he’s inclined to go it alone. An excerpt:

“While this is disappointing, there is some upside. We don’t want a fair-weather friend for an investor on our board, nor someone who doesn’t fully believe in the company’s future and potential. We are also free to pursue the course we feel best without having to please a new, outside investor on the board, who might have pushed for us to run fire drills to make up missed revenue targets rather than focus on the long term.”

Here’s the pitch slide deck that SEOmoz used in the process, to persuade its early backer, Bellevue’s Ignition Partners, to participate in the new round. Note that he’s pitching SEOmoz as Seattle’s next $1 billion company:

Brier Dudley offers a critical look at technology and business issues affecting the Northwest. Send tips or comments to bdudley@seattletimes.com. His column runs Monday, and his commentary appears here all week.